Free Markets, Free People


Economic statistics for 20 Oct 11

Today’s economic statistical releases:

Initial jobless claims dropped 6k from last week to 403k, but that was still 3k higher than analysts expected.

The Bloomberg index of consumer comfort fell to -48.4 from last week’s -50.8.

Existing home sales fell -3.0% to a 4.91 million annual rate in September, mainly due to a 3.6% drop in the key single-family component.

The Philadelphia Fed reports that the Mid-Atlantic manufacturing sector is stabilizing and improving as the general business conditions index rose to 8.7 from -9.8.

Most of the leading economic indicators point to sluggish growth ahead, but loose monetary policy boosted the overall index by 0.2%.

Dale Franks
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Europe’s debt crisis and the US

James Pethokoukis reminds us that if we’re not watching the European debt crisis, we should.  The one thing Tim Geithner apparently got right was how it could effect the US negatively.  Geithner said:

Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand.

And that’s the obvious truth.  If you need to catch up, here’s an article in the Financial Times to bring you up to date (you may need to sign up or register to read it).

Pethokoukis then points to a report from Barclays Capital that details what Geithner was talking about:

Our baseline forecast assumes that policymakers will prevent the turmoil in Europe from leading to a full-blown financial crisis similar to 2008 and that US policymakers will not impose excessive fiscal tightening starting in 2012. If, by contrast, either of these risks is realized, the potential for another recession will increase substantially. We use the Fed’s stress scenario under the Comprehensive Capital Analysis and Review (CCAR) as an alternative scenario to our baseline, but ratchet up the intensity modestly and analyze its effect on the outlook for house prices.

1) Our modeling suggests that in a recession scenario, house prices, as measured by the CoreLogic headline index, could decline another 7% in 2012 . … The scenario posits declining real GDP for four consecutive quarters, with Q2 12 having the deepest decline at 6% (q/q saar).

2) Real disposable personal income also declines for four consecutive quarters, albeit with a one-quarter lag relative to the decline in GDP, and the unemployment rate moves  persistently higher, peaking at 12.1% by the end of our forecast horizon.  …

3) Furthermore, the rising unemployment rate suggests that delinquencies would push shadow inventory higher, putting downward pressure on distressed home prices. Together, the two effects send home prices significantly lower in 2012.

Or in simple terms, if Europe goes, so does the US.  Housing down another 7% and unemployment up into the 12% area.

Obviously this is all based on modeling and plugging in various numbers.  So just as obviously those numbers could be off a bit.  However, the basic premise is correct.  If Europe can’t solve its debt crisis, the US will also suffer and, as you can see, suffer mightily (check out the chart at the link). 

I think the political implications are clear even for the most partisan among us.


Twitter: @McQandO

Economic statistics for 19 Oct 11

Today’s economic statistical releases:

Consumer price inflation remains warm, with the overall CPI up 0.3% for the month, and 3.9% for the year. The core rate—less food and energy, or, stuff you don’t need to buy every day—rose 0.1% for the month and 2% for the year.

Housing starts in September were 658k, up 10.2% on a year-over-year basis. Housing permits, however, fell 5% to 594k, but up 5.7% from last year.

The Mortgage Bankers Association reports a short Columbus Day week saw mortgage applications fall -14.9%.

Dale Franks
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Economic statistics for 14 Oct 11

Today’s economic statistical releases:

Retail sales in September were much stronger than expected, rising 1.1%, and 0.6% less autos.

Export prices were up 0.4% last month, while import prices rose by 0.3%. On a year-over-year basis, import prices rose 13.4%, while export prices rose 9.5%.

Despite strong retail sales, consumer sentiment continued to slide last month, with the index dropping to 57.5.

Business inventories rose 0.5% August, in line with sales, while the stock-to-sales ratio remained unchanged at 1.28.

Dale Franks
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How clueless? This clueless

Rep. Keith Ellison, a Democrat member of the House from MN, explained why he thought creating more and more regulations was a good idea.  You see, the more you pass, the more people businesses have to hire to comply with them, per Ellison:

"I think the answer is no," Ellison said when asked if he believes regulations kill jobs. "And here is why: When we talked about increasing fuel efficiency standards, the industry responded, and they need engineers and designers and manufacturers, and they need actually more people to help respond to the new requirement."

"I believe if the government says, look, we have got to reduce our carbon footprint, you will kick into gear a whole number of people that know how to do that or have ideas about that, and that will be a job engine. I understand what you mean, because if anything adds a cost to a business, you could assume that that will diminish that business’s ability to hire. But I don’t think that’s actually right. I think what businesses want is customers and what — if they are selling product, if they have a product to sell they will do well even if they have some new regulations to meet," the Congressman said.

The economic ignorance in that statement is dumbfounding.  The man obviously has no idea of what productive vs. non-productive work entails.  Bureaucrats don’t “produce” anything but cost.  They impose a cost burden that the producer must pass on or eat.

Most producers choose to pass on the cost burden in the price of what they produce (it obviously depends on the competitiveness of the market, profit margins, etc.).   So in essence, every new regulation that imposes a compliance cost on a producer means those who consume the product end up paying the compliance cost in the price of the product at some point or another.  And the man hours that could have been used in a productive job are wasted in seeking compliance with bureaucratic regulation.

These are the guys in Washington DC making decisions about your future.   They’re deciding what portion of what you earn you should be allowed to keep.  And they have no idea of what makes an economy run.

Here’s a representative that figures a job is a job.  And he actually thinks he’s creating jobs what will benefit the economy by increasing regulation and bureaucracy.

Unfortunately his type are more prevalent that you might imagine.  And our present situation is beyond their understanding.  How does one go on a national television network and make statements like that and think they’re being profound when in fact what they say is profoundly ignorant?   He obviously doesn’t know that.  That’s just scary.

When all is said and done about our current situation, when the hindsight evaluations are made and the scope of the disaster is understood, it will be clear that people like Rep. Keith Ellison were as responsible as anyone for our economy’s inability to recover.

And he won’t even know it.


Twitter: @McQandO

Bill Clinton: No new taxes until economic upturn

This is so “Econ 101” I’m surprised it has to be stated out loud, but of course it does because the Democrats insist on raising taxes now.  Bill Clinton, for heaven sake, on the David Letterman show last night:

“Should you raise taxes on anybody right today — rich or poor or middle class? No, because there’s no growth in the economy,” Clinton said on the “Late Show.” “Should those of us who make more money and are in better position to contribute to America’s public needs and getting this deficit under control pay a higher tax rate when the economy recovers? Yes, that’s what I think.”


I disagree with his final bit of collectivist nonsense, but his point about raising taxes now is simply common sense, something which seems to be in short supply on the left these days.

Look, the problem isn’t one of revenue, it’s a problem of spending.  More revenue won’t solve the problem.  It  may slow the debt accumulation a bit, but until these yahoos face up to the fact that the rich aren’t the problem -they are -we’re going to see the same spending patterns that have gotten us into the mess we’re in now.

Like it or not, soaking the rich for more taxes won’t change a thing in terms of debt unless Congress kicks the spending habit and restores fiscal sanity.  This class warfare meme the Democrats are running is just another version of kicking the can down the road because they want to spend just like the old days.

This nonsense is directly out of Karl Marx’s “‘Critique of the Gotha Program” which outlines this deadly principle of socialism – “From each according to his ability, to each according to his need.”

We continue to be told we’re not a socialist nation and we’re not headed in that direction, but observation and listening to what certain politicians say gives lie to that claim.  The first part of the Clinton quote may be “Econ 101”, but the second part is “Marxism 101”.

We need to quit tiptoeing around and call it what it is.


Twitter: @McQandO

Economic statistics for 13 Oct 11

Today’s economic statistical releases:

The US trade balance was little changed from a deficit of -$44.8 billion in July to -$45.6 billion in August.

Initial claims for unemployment dropped 1,000 to 404,000 from last week’s revised 405,000. Last week was originally reported at 401,000. Anything above 400,000 isn’t very good.

The Bloomberg Consumer Comfort Index hovered at a historic low of -50.8 last week, as American consumer pessimism increased.

Dale Franks
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Why Occupy Wall Street has it wrong

If you listen to those who are semi-coherent in the Occupy Wall Street crowd, they blame Wall Street for the financial straits we’re in. They’ve been convinced (and I’m sure for most it didn’t take much convincing) that it is the greed and recklessness of bankers and Wall Street tycoons which caused the housing bubble and subsequent financial collapse.

However Peter Wallison has taken the time and made the effort to lay out the entire sequence of government actions (and their subsequent consequences) which drove both the housing bubble and its collapse which put us in the financial position we’re in today.

As usual, it was government intrusion – in the name of social justice – that distorted the housing market and created incentives that otherwise wouldn’t have been there. Social engineering, with the best of intentions, that led to catastrophic unintended consequences.

The irony, of course, and what Wallison points out, is the OWS crowd is clueless at best or mendacious at worst. But the fault for our condition should be laid squarely in government’s lap. Where these protests should be taking place is in front of Congress, the White House, Fannie Mae and Freddie Mac and the Federal Housing Administration – not Wall Street.

Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007.

It is certainly possible to find prime borrowers among people with incomes below the median. But when more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards.

Fannie and Freddie were not the only government-backed or government-controlled organizations that were enlisted in this process. The Federal Housing Administration was competing with Fannie and Freddie for the same mortgages. And thanks to rules adopted in 1995 under the Community Reinvestment Act, regulated banks as well as savings and loan associations had to make a certain number of loans to borrowers who were at or below 80% of the median income in the areas they served.

So there are the required guidelines – by law – enforced by government. And note, it wasn’t just Democrats. It was Republicans too. But the impetus and driving force behind all of this wasn’t Wall Street. It was government.

Moving on:

Research by Edward Pinto, a former chief credit officer of Fannie Mae (now a colleague of mine at the American Enterprise Institute) has shown that 27 million loans—half of all mortgages in the U.S.—were subprime or otherwise weak by 2008. That is, the loans were made to borrowers with blemished credit, or were loans with no or low down payments, no documentation, or required only interest payments.

Of these, over 70% were held or guaranteed by Fannie and Freddie or some other government agency or government-regulated institution. Thus it is clear where the demand for these deficient mortgages came from.

The huge government investment in subprime mortgages achieved its purpose. Home ownership in the U.S. increased to 69% from 65% (where it had been for 30 years). But it also led to the biggest housing bubble in American history. This bubble, which lasted from 1997 to 2007, also created a huge private market for mortgage-backed securities (MBS) based on pools of subprime loans. [emphasis mine]

Subprime loans, required by law to go to a certain percentage of applicants who otherwise wouldn’t get loans, built to half of all loans closed. Bubble created. Why? Because you’re talking about government “guaranteed” loans – safe money. That created a private market for MBS because the subprime loans in question would have been a poor risk on their own, but were a good risk with the government guarantee.

Demand grew, the bubble grew. But this was a foundation built on financial sand:

As housing bubbles grow, rising prices suppress delinquencies and defaults. People who could not meet their mortgage obligations could refinance or sell, because their houses were now worth more.

Accordingly, by the mid-2000s, investors had begun to notice that securities based on subprime mortgages were producing the high yields, but not showing the large number of defaults, that are usually associated with subprime loans. This triggered strong investor demand for these securities, causing the growth of the first significant private market for MBS based on subprime and other risky mortgages.

Again, because of who was holding or guaranteeing the loans, the real risk was masked, thereby triggering demand for these high-yield securities. How risky could they really be if they’re backed by the full faith and credit of the US, right?

And so the MBS market continued to grow:

By 2008, Mr. Pinto has shown, this market consisted of about 7.8 million subprime loans, somewhat less than one-third of the 27 million that were then outstanding. The private financial sector must certainly share some blame for the financial crisis, but it cannot fairly be accused of causing that crisis when only a small minority of subprime and other risky mortgages outstanding in 2008 were the result of that private activity.

And there is the salient point. No government intrusion, no government guarantees, no laws which “encouraged” or put quotas on loans with a certain percentage in the subprime category and no housing bubble, no demand for risky MBS, no financial crisis.

People, as they have for centuries, would have actually had to meet much stricter criteria for a loan and fewer would have owned homes. The market would have stayed stable, no bubble would have developed and we’d not be in the shape we’re in today. Oh, don’t get me wrong – government would still be out of control and on it’s eternal spending spree – but we wouldn’t have the added financial stress of a recession caused by government.

When the bubble popped, the inevitable happened:

When the bubble deflated in 2007, an unprecedented number of weak mortgages went into default, driving down housing prices throughout the U.S. and throwing Fannie and Freddie into insolvency. Seeing these sudden losses, investors fled from the market for privately issued MBS, and mark-to-market accounting required banks and others to write down the value of their mortgage-backed assets to the distress levels in a market that now had few buyers. This raised questions about the solvency and liquidity of the largest financial institutions and began a period of great investor anxiety.

The government’s rescue of Bear Stearns in March 2008 temporarily calmed the market. But it created significant moral hazard: Market participants were led to believe that the government would rescue all large financial institutions. When Lehman Brothers was allowed to fail in September, investors panicked. They withdrew their funds from the institutions that held large amounts of privately issued MBS, causing banks and others—such as investment banks, finance companies and insurers—to hoard cash against the risk of further withdrawals. Their refusal to lend to one another in these conditions froze credit markets, bringing on what we now call the financial crisis.

And there’s the real litany of how what happened happened. Market distortion by government is the real cause of this debacle. We’ve been pointing this out for quite some time. The problem, of course, is the unintended consequences of such intrusion seem never to be understood by the lawmakers and technocrats who come up with these sorts of grand social justice schemes. And again, understand that it wasn’t just the Democrats who helped this all along.

The bottom line however, as Wallison points out, is that while Wall Street isn’t blameless in all of this, their role, in comparison, is minor. The entire scenario was government inspired. However, that’s not what has been sold to the public. Instead we’ve gotten propaganda and class warfare in a blatant attempt to shift the blame to private concerns:

The narrative that came out of these events—largely propagated by government officials and accepted by a credulous media—was that the private sector’s greed and risk-taking caused the financial crisis and the government’s policies were not responsible. This narrative stimulated the punitive Dodd-Frank Act—fittingly named after Congress’s two key supporters of the government’s destructive housing policies. It also gave us the occupiers of Wall Street.

Indeed. If anyone needs to be in jail it is the perpetrators of the government policy that encouraged/required the market distortion that led to the bubble and ultimately collapse of the housing market.

That wasn’t Wall Street. What happened in the financial community is they reacted to an incentive created and supposedly guaranteed by government. But it was unsustainable. And it finally came to a head, dealing financial destruction all around.

Here’s the bottom line – no government intrusion, no incentive/requirement to push subprime loans. No subprime loans (especially in the amount required by government), no housing bubble. No housing bubble, no financial crisis. No financial crisis, no OWS, who simply have it all wrong.

But then, given the government propaganda effort to this group who want to believe what government is claiming, is anyone surprised?


Twitter: @McQandO